This is what you can expect from interest rates in 2024

After last year, when the South African Reserve Bank increased the repo rate from 7% to a 14-year high of 8.25%, many South Africans would like to know what to expect from interest rates this year.

In the first meeting of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) of 2024, Lesetja Kganyago, governor of the Sarb, largely echoed his prevailing sentiments regarding the serious upside risks to inflation, with the committee unanimously voting to keep the repo rate unchanged.

Thalia Petousis, portfolio manager of the Allan Gray Money Market Fund, says there are many risks that inflation can increase again that informs the MPC’s outlook but these risks seem more muted than those that weighed on the local and global economy over the last two years. 

“While it is sensible to expect a rate cutting cycle to begin soon, it might be a short and shallow one given strong offshore labour markets and US consumer demand, as well as structural constraints within the SA economy that drive up the level of prices.”

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What keeps Kganyago up at night about the repo rate?

Petousis says if you are wondering what keeps Lesetja Kganyago up at night, she might have the answer. “Chief among Kganyago’s concerns are high and unpredictable local food prices, such as those seen in the egg market after the avian bird flu outbreak and slow progress in local hen vaccinations.”

She says food inflation is notoriously difficult to predict, but she believes that the upside risks are far lower than they were in 2022 and 2023. “Not only have we have rolled off a large base in prices, but South Africa also walked away from the much predicted El Nino weather cycle unscathed so far and with high yellow maize crop yields.”

Petousis points out that Kganyago also remains concerned about the inflationary read-through from load shedding and the logistical constraints at South Africa’s ports and along Transnet’s rail network. 

“While these constraints have the capacity to continue raising the local cost of production, the caveat is that the damage should be more muted than that caused during the peak stage 6 load shedding of 2023. Management changes at Transnet might also herald a greater willingness to accept private sector involvement to solve the logistics crisis.”

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Offshore inflationary trends

When looking at offshore inflationary trends, Petousis says Kganyago’s apprehension is mainly fed by the strong US labour market and high wage growth, which could ignite second round inflation effects via robust consumer demand for services and goods. The only issue with the US labour market is that there is no issue with it, as unemployment remains at around its lowest level in decades.

She says geopolitical tensions, such as the Red Sea attacks, are also lengthening global shipping times, although on a far smaller scale than what we became accustomed to in 2022. “However, a third of all global container shipping passes through the Suez Canal and the rerouting of trade via the tip of Africa certainly jeopardises the ‘just in time’ delivery model”

Petousis warns this could represent a transitory upside risk to the inflation forecast if supply of finished goods dwindles or becomes more costly. Large US auto-manufacturers have already announced they are going to idle capacity during February because of these delays, with some resorting to far more expensive air freighting.

Several Sarb members have communicated that high interest rates have not been their ideal outcome but have been necessary because the bank carries an outsized burden when it comes to stabilising South Africa’s macro economy and inflation.

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Administered prices and interest rates

The Sarb’s final bugbear is that administered prices, such as prices for electricity, water and rates and taxes, have been allowed to increase at double digits and faster than the country’s targeted price inflation.

Petousis says these pricing pressures necessitate that the Sarb keeps rates higher than it would prefer as a necessary evil that serves to lower consumers’ borrowing appetite and crush household demand. In theory, such action is meant to arrest any second-round price increases from taking hold.

“Having said this, the market is pricing for the Sarb to begin cutting interest rates in mid-2024 in line with its quarterly projection model. Although this model is merely a policy suggestion, it pencils in a short and shallow cutting cycle with the repo rate dropping from 8.25% to 7.3% by the end of 2025, which is still 100 basis points higher than its pre-Covid level.”

She says given the Sarb’s mandate to maintain price stability in the economy and given Kganyago’s expectations for higher and stickier global inflation, a restrictive rate is seen as far more necessary than in the past. “Only time will tell,” she says.